Divestures
Sale of a portion of the firm
Equity Carve Out
-Divestiture: parent sells minority stake of division or subsidiary through IPO
-Parent monetizes ownership without fully divesting
-Subsidiary becomes public company and parent has controlling stake
-Purpose: raise capital for division
Process Equity Carve Out
-Public offering of stock
-Parent company may maintain controlling interest
-New legal entity is created —> separate from parent
Spin Off
-Parent separates subsidiary —> creates new independent company
-Daughter is fully owned subsidiary
-Purpose: focus on core business or raise capital
Process Spin-Off
-Separate unit from company
-New shares are issued & distributed to same shareholders on a pro-rata basis
-Debt is allocated between both —> relative to size
-Provide liquidity for parent shareholders —> they can sell their shares
Demerger
Term used for Spin-Off
Split-Off
-Divestiture: company offers shareholders to exchange shares in parent for shares in subsidiary
-Simplify corporate structure & raise capital
Divestiture Issue
-Reverse synergy
-Value of subsidiary is lower than expected —> worse than retaining busines
-Subsidiary relies on parents network and purchasing power —> loses it
Sell-Off Process
-Plan creation (Spin-Off, …)
-Shareholder Approval
-Registration of Shares
-Deal Completion
Sharehodler Wealth Effects of Sell-Offs
-Long-Term: positive wealth effect
-Larger company —> larger wealth effect
Example Spin-Off & positive wealth effect
-Cadburry Schweppes separated beverage & confectionary business
-100 Cadburry Schwepees shares —> 64 Cadburry & 12 Dr. Pepper
-Upward price before & after announcement
Strategy & Vertical Integration Reversals
-Ford acquiring Hertz
-Refocused on production & sold Hertz with profit
Voluntary Sell-OIfs: Acquire Multi-Unit Target
-Starwood Capital acquired Taittinger
-Starwood resold champagne business to Taittinger family
Reasons for Sell-Offs & Resell
-Lose unwanted parts of company
-Lose poorly performing units
-Lose value holding down parts
Sell-Off: Strategy of Increasing Focus
-Industrial Focus —> positive wealth effect
-Geographical Focus —> negative wealth effect
-US spin-offs more positive than Europeans
Sell-Off: Need Money —> Sell Unit
-Hertz was doing well —> Ford needed money
-Ford sold Hertz to PE-firm
Sell-Offs: Abandoning Core Business
-Boise Cascade sold paper production
-Paper production not profitable
-Refocusing on retail
How Carve-Out Share are sold - Possibilities
-Sold in public offering —> parent receives cash
-Issued to parent’s shareholders as dividend
-Shares exchange listed
Carve-Outs
-Financial instrument —> increases stock price without control loss
-Carve-Outs lead mostly to control changes & positive wealth effect
Spin-Off: Shareholder Approval
-Spin Off done with dividend —> approval required
-Dividend policy as director responsibility
-Director personal liable —> need insurance
Gains in Sell-Offs
-Information
-Managerial Efficiency
-Focus on core business
-Management Incentives
-Regulatory Factors
Information
-Value of subsidiary —> not clear as corporate value
-Stock market prefers own valuation
Managerial Efficiency
-Ability to manage large & diverse entities?
Management Incentives
-Management incentives more closely to performance
-Performance more measurable the smaller the company
Regulatory Factors
-Regulated entities may be penalized for linked with parent
-Spin-off so they aren’t affected by laws of parent
Last changed6 months ago